Making Cents in Penny Stocks

While low-priced stocks can be cheap for a reason, they might also present some overlooked opportunities.

The occasional shower of pennies from heaven might do our bank accounts some good, but we Fools can't say the same for penny stocks. The world of penny stocks is often full of manipulation and deceit, making it harder for investors to separate its few good offerings from the multitude best ignored.

Still, many investors dabble at the low end of the stock-price spectrum. At Motley Fool CAPS, we award the "Pennies" title to investors who rate stocks trading in the single digits more than half the time. Believe it or not, you'll find some of the best CAPS All-Stars among those members.

Pinching penniesThis week, we'll look at some of the low-priced investments these All-Stars have praised. If the best investors regularly scanning this end of the market have singled out these companies, we might want to turn our umbrellas upside-down -- or run for cover!

Your two cents' worthIt's nothing if not a contrarian play to see Maguire Properties outperforming the market. The real estate investment trust is heavily invested in the Southern California office space market -- not exactly the first place you'd want to hold property. Commercial real estate services company CB Richard Ellis(NYSE:CBG) calculates the vacancy rate in Orange County at more than 15%, with availability of space on the rise.

Although Maguire itself didn't invest in subprime mortgages, it still suffered because, according to the company, many of the tenants in its buildings were subprime specialists. So why might it have a chance to outperform the market? Company founder Robert Maguire recently wrote to shareholders that if it sold just one of its 30 properties, it could realize more than the REIT's entire market cap at recent depressed prices.

Nevertheless, the market has taken a dim view of the stock, with CAPS member speda12 seeing it as simply having "Excessive leverage." In August, CAPS All-Star bsharvy pointed to a triumvirate of problems facing Maguire:

While fourth-generation WiMAX technology may put Sprint Nextel(NYSE:S) in the forefront of next-generation cell phones, the "old" 3G market still has plenty of legs. A deal for RF Micro Devices to supply the chips for 10 new Samsung phones ought to keep the wolves at bay for a while. CAPS member hwyman64 thinks the contract is worthwhile for RF Micro Devices:

Successful contract to supply Samsung for 10 handsets. Opening new offices and continue to show good earnings.

Already an industry leader.

Chip maker Taiwan Semiconductor is another leader that has been beaten down. The company held up fairly well in the bear market until last month, when Intel(NASDAQ:INTC) and other chip makers finally started experiencing losses. Last month, CAPS member mwalrath90 wrote that Taiwan Semiconductor exhibits not only technical indications of superiority, but fundamental ones as well.

In the long run TSM should outperform the semiconductor industry. Compared to other large cap semi stocks, TSM has a very high [return on equity] and net profit margin which shows that they have the ability to effectively utilize capital. Also, with a dividend yield over 5% this stock could potentially yield high returns in the long run, and will be a safe investment because this [is] a large cap stock.

Make some changeWhat do you think? Should we fill up the change jar with these penny stocks, or ignore 'em like a discarded coin on the street? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page.

In the coming weeks, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. The service, which just launched, will rely heavily on proprietary CAPS "community intelligence" data to establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.